Edited version of private ruling

Authorisation Number: 1011857935291

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Ruling

Subject: Capital gains tax - main residence

Question and answer:

Does the capital gains tax main residence exemption apply to the sale of the property acquired by the Public Trustee as trustee of a deceased estate that had beneficiaries who were minors at the time of the acquisition where the property was the main residence of the beneficiaries?

No.

This ruling applies for the following period:

Year ended 30 June 2010
The scheme commenced on:

1 July 2009
Relevant facts and circumstances

You and your siblings were left orphaned after the deaths of both of your parents.

At that time you were all living in the family home.

You were all minors at the time of your parents' death.

Following the deaths of your parents you were immediately removed from the family home and put into the care of relatives who applied for and were granted custody.

Parent A did not have a Will. Parent B did leave a Will which left the family home to Parent A and, on their death to all the children.

Because you were minors at the time of your parents' death, the estate was transferred to the Public Trustee as legal personal representative of Parent A's estate.

The Public Trustee decided that the family home would be sold immediately.

The proceeds from the sale of the family home were put into an account with the Public Trustee who then purchased a house for you, your guardians and their children.

The property was purchased on your behalf by the Public Trustee in the name of Parent A's estate.

The house was never held or transferred into any of your names.

When the youngest sibling and beneficiary of the estate turned 18 the Public Trustee wished to close your case as all siblings were legal adults. They advised that the house needed to be sold or be transferred into your names.

After many talks and meetings you decided you had no other option but to allow permission for the Public Trustee to sell the house on your behalf.

The Public Trustee assured you on many occasions that by doing this you would not have to transfer the house into your names and hence it would mean you would under no circumstances have to pay tax on the sale of the house as you were never the actual owners of the house given that it was always held in the name of your deceased Parent A's estate.

The property was sold in the 2009-10 income year and each of the four children received a sum of the sale.

Once the house was sold and it came time to lodge your yearly tax returns, the Public Trustee contacted you in writing and advised that you would have to pay capital gains tax on the sale of the property.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 95
Income Tax Assessment Act 1936 Section 97
Income Tax Assessment Act 1936 Section 98
Income Tax Assessment Act 1997 Section 100-10
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 106-50
Income Tax Assessment Act 1997 Section 118-110
Income Tax Assessment Act 1997 Section 118-195
Income Tax Assessment Act 1997 Section 118-210

Income Tax Assessment Act 1997 Section 128-10

Income Tax Assessment Act 1997 Section 128-15

Income Tax Assessment Act 1997 Section 128-20
Income Tax Assessment Act 1997 Section 995-1(1)

Reasons for decision

Please note all references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Capital gains tax

Section 100-10 explains that capital gains tax (CGT) is the income tax you pay on any net capital gain you make as a result of a CGT event taking place. Capital gains are included in your assessable income and therefore affect your income tax liability.

CGT events are the different types of transactions that may result in a capital gain or capital loss. The most common event is CGT event A1. CGT event A1 takes place when you dispose of an asset to someone else. Section 104-10 says that you are deemed to have disposed of an asset if a change in ownership occurs from you to another entity.

When the property acquired by the Public Trustee was sold in the 2009-10 income year this triggered CGT event A1.

When considering a disposal, the most important element in the application of the CGT provisions is ownership. It must be determined who the legal owner of the asset is and who is its beneficial owner. In the absence of evidence to the contrary, property is considered to be owned absolutely by the entity or entities registered on the title.

Main residence exemption
Section 118-110 contains the basic capital gains tax (CGT) exemption for capital gains or losses made from a CGT event involving a taxpayer's main residence. The section advises that capital gains or capital losses made from a CGT event relating to a CGT asset that is a dwelling or the taxpayer's ownership interest in it can be disregarded if certain conditions are satisfied.
The conditions which must be satisfied for the exemption to apply are:

(a) the taxpayer is an individual (not a company or trust);

(b) the dwelling was the main residence of the taxpayer throughout the ownership period;

(c) the interest did not pass to the taxpayer as a beneficiary or the trustee of the estate of a deceased person; and

(d) the capital gain or loss arises out of one of the specified CGT events.

As the property was acquired in the name of your deceased Parent A's estate, it was owned by a trust. Therefore the conditions of the main residence exemption under 118-110 are not satisfied.

Absolute entitlement of beneficiaries

In some cases, an entity may hold a legal ownership interest in a property in trust for another entity. If this is the case, and the beneficiary is absolutely entitled to the CGT asset, section 106-50 provides that an act done by the trustee, such as disposal of the property, is treated as if it was carried out by the beneficiary.

The following are key factors taken from Taxation Ruling TR 2004/D25 which must be present in order for a beneficiary to establish absolute entitlement to an asset:

Beneficiary's interest must be vested and indefeasible
The interest a beneficiary has in the trust asset must be vested in possession and indefeasible. A vested interest is one that is bound to take effect in possession at some time and is not contingent upon an event occurring that may or may not take place. A beneficiary's interest in an asset is vested in possession if they have the right to immediate possession or enjoyment of it.

The interest must not be able to be defeated by the actions of any person or the occurrence of any subsequent event. For example, if the class of potential beneficiaries has not yet closed then a beneficiary's interest is capable of being defeated, at least in part, by the admission of new beneficiaries to the class.

One beneficiary with all the interests in a trust asset

If there is more than one beneficiary with a vested and indefeasible interest in trust assets TR 2004/D25 directs that the assets must be fungible. Assets are fungible if each asset matches the same description such that one asset can be replaced with another. They are fungible if they are of the same type (for example, shares in the same company and with the same characteristics). TR 2004/D25 points out at paragraph 94 that land would rarely be fungible because each parcel of land is unique.

As there was one real property, and four beneficiaries, no beneficiary was absolutely entitled to the property. This is confirmed in paragraph 125 of TR 2004/D25 where it says that if there is a shared interest in the trust assets, this prevents absolute entitlement.

Assets owned by the deceased

There are special rules that apply if you are a beneficiary or a trustee of a deceased estate (sections 118-195 to 118-210).

Subsection 118-195(1) advises that a full main residence exemption is available in respect of the main residence of a deceased person if you are an individual and the interest passed to you as a beneficiary in a deceased estate, or you owned it as the trustee of a deceased estate.

The property was not owned by your deceased parents as it was acquired by the Public Trustee in the name of your deceased Parent A's estate. For this reason the main residence exemption is not available under the special rules contained in subsection 118-195(1).

Assets acquired by trustee

Section 118-210 applies if a trustee of a deceased estate, under the deceased's Will, acquires an ownership interest in a dwelling for occupation by an individual.

Taxation Determination TD 1999/74 explains that a trustee acquires an ownership interest in a dwelling under the Will of a deceased person for the purposes of subsection 118-210(1) if the interest is acquired in accordance with the terms of the Will, or in accordance with the terms of the Will as modified by any court order.

The trustee also acquires an interest under the deceased's Will if they acquire it in pursuance of the Will or under the authority of the Will (Evans v. Friedmann (1981) 53 FLR 229 at 238). The acquisition need not be in strict conformity with the Will or expressly by force of the Will but, if it is the requirements of subsection 118-210(1) are, in any case, satisfied.

However, TR 1999/74 goes on to point out that if a trustee acquires an ownership interest in a dwelling in the course of the administration of an intestacy, the trustee does not acquire the interest 'under the deceased's Will' for the purposes of subsection 118-210(1) because there is no Will.

The property was purchased by the Public Trustee as your legal personal representative in the name of Parent A's deceased estate. As Parent A did not have a Will, the Public Trustee was not acting in accordance with the terms of the Will or under the authority of the Will. For this reason the special rules that apply to beneficiaries or trustees of a deceased estate contained in subsection 118-210(1) do not apply to your circumstances.

Presently entitled beneficiaries

As the trustee acquired the property and subsequently disposed of that property, the resulting capital gain or capital loss cannot be disregarded. In accordance with the decision of the High Court in Charles v FCT (1954) 90 CLR 598 this capital gain will retain its character as a capital gain in the hands of the presently entitled beneficiaries.

Taxation Ruling IT 2622 discusses present entitlement during the stages of administration of deceased estates. Paragraph 19 advises that the net income of the trust estate and whether any beneficiary is presently entitled to a share of income of the estate are determined on the last day of the financial year. This approach is also supported by the decision in F.C. of T. v. Galland 86 ATC 4885; (1986) 18 ATR 33.

This means that, on the last day of the income year, provided a beneficiary has become presently entitled to a share of the income of the trust estate on or before that day, the beneficiary is assessable on that share of the net income of the trust estate calculated in accordance with section 95 of the Income Tax Assessment Act 1936 (ITAA 1936). The calculation required by section 95 of the ITAA 1936 includes in the net income of the trust estate the assessable income derived by the trust estate for the whole of the income year concerned.

Summary and conclusion

A trust was created when the Public Trustee acquired the property in the name of your deceased Parent A's estate. At that time you were all under a legal disability as you were under 18 years of age; at that time you were not presently entitled beneficiaries of the trust.

As you each turned 18 years of age, you were no longer under a legal disability and you became presently entitled beneficiaries. At that stage, the trustee was no longer assessable on income of the estate on your behalf under section 98 of the ITAA 1936.

When the property was sold by the Public Trustee the estate was fully administered during the 2009-10 income year.

The trustees exercised their discretion and applied the net income of the trust from the sale of the property for the benefit of you as beneficiaries. You are therefore assessable under section 97 of the ITAA 1936, and must report the income on your individual tax returns.

Where a discounted capital gain made by the estate flows through to a beneficiary, the beneficiary is required to gross up the capital gain by multiplying it by two. This allows for the beneficiary to apply any capital losses they may have and then apply the capital gains tax discount.